Why strategists are so bullish on Canadian stocks, even in the midst of a trade war


With global stocks roiled by the U.S.-China trade brawl and a dimming outlook for global growth, strategists say one market should hold up better than most — Canada.

The benchmark S&P/TSX Composite index has lost 0.9 per cent since the end of July compared with a 3.2 per cent slide in the S&P 500. While that’s wiped out about US$47 billion in market value, Canadian stock watchers remain relatively upbeat.

They have reason:

The Canadian economy expanded for a third-straight month in May, reinforcing the view that the Bank of Canada can remain on the sidelines for now, though bets of a rate cut have risen along with those at other central banks. More than two-thirds of companies that have reported earnings results have beat estimates, according to data compiled by Bloomberg. The rally in the price of gold has lifted shares of miners, which make up almost 12 per cent of the benchmark index.

Global investors have become “too short-sided, too reactive, too fearful,” said Brian Belski, chief investment strategist at BMO Capital Markets.

Profit at companies in the S&P/TSX Composite Index has hit a record high and Canada’s “fortunes” are tied to the hip with the U.S. economy, which remains solid despite its trade issues, he said.

“We remain very bullish on Canada,” said Belski, who has a 17,000 year-end target for the key equity gauge, up about 4.5 per cent from Wednesday’s close.

A rally in commodity prices, economic and earnings growth, bullish sentiment about the burgeoning cannabis industry and its strong correlation with the U.S. stock market propelled Canada’s benchmark index to a record high in April. On Wednesday, the market snapped its longest losing streak since September 2018 to end up 0.7 per cent at 16,265. It’s still up 14 per cent for the year, compared with 15 per cent for the S&P 500.

The nation’s economy has strengthen since the beginning of the year, the labour market has been on a tear and Canada’s real estate market — a bellwether of the economy — has seen signs of stability with strong prices and increasing sales in major cities like Toronto.

To top it off, inflation of 2 per cent ties with the U.K. for the highest in the Group of Seven and right at the Bank of Canada’s target.

Technicals argue caution.

The intermediate moving average convergence divergence momentum indicator is trending on a sell signal, suggesting that the current correction needs more time to play out, according to Tina Normann, technical research analyst at Eight Capital.

“Therefore look for limited upside toward the 16,300 zone on any near term rally,” she said in a note.

Investors would need to see stabilization in bond yields before committing capital to the market, she said and added that a more attractive entry point will likely present itself in mid-September.

Canada’s 30-year bond yield reached a record low of 1.39 per cent on Wednesday and one segment of Canada’s government-bond yield curve reached its most inverted level since 2000 earlier this week as traders added to bets the nation’s central bank will wind up cutting interest rates. The Canadian Imperial Bank of Commerce moved forward its call for a Bank of Canada rate cut to the first quarter of 2020 from the second quarter on Wednesday.

So where can investors put their money north of the border?

“In light of stock market weakness, we believe that the positive attributes of regulated utility stocks could be attractive to a number of investors,” said Robert Kwan, an analyst at RBC Capital Markets said in an Aug. 7 report.

The S&P/TSX Utilities Index has climbed 23 per cent this year and investors flocked to safer sectors. “The allure of regulated utility stocks is driven by no material exposure to trade wars (e.g., no China exposure),” Kwan said. They also get a tailwind from environmental, social and governance considerations with respect to investment fund flows and long-term interest rates that are within striking distance of record lows, he said.

Bloomberg.com

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